Software Engineers Aren’t Underpaid

by Reihan Salam

Farhad Manjoo thinks that Silicon Valley engineers are underpaid. I disagree. I don’t think it’s meaningful to say that all engineers in Silicon Valley are systematically underpaid. Rather, I think the market is working fairly well, and shrewd firms are adjusting as necessary to the need for talent.

Software engineers in the Bay Area are underpaid when you consider the billions in wealth their work creates.

Do all software engineers collectively create X amount of wealth, or do some create lots of wealth in teams embedded in particular firms? We have many examples of engineer-entrepreneurs who’ve made large fortunes. But one of the reasons we like entrepreneurship is that successful entrepreneurs rarely capture all of the value they create. They generate a great deal of consumer surplus — and we generally see this as a feature, not a bug. It would sound odd to our ears if someone argued that Marc Benioff should be capturing a much bigger slice of the value he’s created for thousands of businesses and consumers around the world. In a similar vein, many workers produce more value than they capture, and of course many workers benefit mightily from access to capital owned by others. It’s very hard to adjudicate who deserves what, which is why compensation is best left to a decentralized trial-and-error discovery process, e.g., a competitive marketplace.

In interviews with several engineers — and after scanning the boards on Glassdoor.com, which lets people post anonymous salary info for all to see — I found that a programmer with a few years of experience can expect to make somewhere between $100,000 and $150,000 a year at one of the Valley’s powerhouse companies. In most parts of the country, that is a great salary. But in Silicon Valley, 13% of households make more than $200,000 a year, and single-family homes frequently sell for more than $1 million.

This is a reason why many technology firms have either decamped for (relatively) low-cost metros, like Austin, Boulder, and Boise, and also why many firms allow at least some of their workforce to work remotely. The agglomeration of talent in the Valley still makes it very attractive, and the cost of living is bonkers. To some extent, the cost of living reflects climate and other relatively fixed amenities, including the accretion of knowledge capital in the region. But of course land-use restrictions also pay a very big role. Why does it follow that engineers are underpaid rather than that local governments in the region should stop imposing toxic restrictions on land use that raise the cost of housing? The federal government doesn’t help matters thanks to the mortgage interest deduction and the state and local tax deduction. By all means let’s address the ways in which bad public policies increase the cost of living and stifle the growth of private firms. It doesn’t follow that engineers in the Valley are underpaid as a class.

An engineer in San Francisco told me that he could never dream of buying a house in the city on his pay; another said that it would be impossible to pay off his student loans anytime soon. Compare their salaries to those of the lawyers, doctors, bankers, consultants, VCs, and other professionals who populate the neighborhood.

Again, is there something magical about engineers that leads us to believe that they should be entitled to purchasing homes in extremely desirable areas? If the problem is the cost of housing, let’s tackle building restrictions, not just for engineers but for everyone. 

If the big tech companies were smart, they would begin to reverse this era of underpaying their most valuable employees. For one thing, it’s draining the talent pool because the comparatively middling salaries push smart people toward other careers. “The cream of my computer-science students don’t become engineers; they go to Wall Street or become management consultants,” says Vivek Wadhwa, a professor at the Pratt School of Engineering at Duke University. A decade out of college, a consultant could be earning nearly a million dollars a year, while an investment banker could make many millions, he says.

I sense that the big tech companies are pretty smart indeed, and that they differentiate pay for a number of reasons — are you unusually productive? We’re afraid of losing you and we will pay you more. Have you received another offer? We will pay you more Are you inclined to jump ship and start your own firm? We’ll give you more pay and more autonomy, etc. The big tech companies will pay as much as they feel they have to, and software engineers who don’t like it are welcome to jump ship. Unless, that is, they have a contractual obligation, which of course comes down to making smart individual decisions about how much you’re worth to your employer.

And Wadhwa’s numbers are all but meaningless. Is the modal consultant making seven figures a decade out of school? No. The modal investment banker? No. Might the person who makes millions as a consultant or investment banker have made the same amount as a software engineer? Quite possibly — if she chose to go the entrepreneurial route, or if she joined a fast-growing start-up at the right time. 

Moreover, we’re neglecting the role of psychic income. Programmers are not unlike artists or writers. How many hours do they spend on work they find pleasurable vs. an investment banker? That varies from person to person, and it shapes calculation regarding the reservation wage. Some software engineers find long hours programming pretty miserable. More pay could dull this terrible feeling. But my sense is that programmers who hate their work are rarely the best programmers. 

The current salary level for programmers also promotes a gambler’s view of work, which hurts established companies’ long-term stability. People often leave steady jobs at companies with lots of resources in order to join startups that hold the promise of an acquisition jackpot. Several young engineers said that this was, in fact, their life plan. “I’m a little young for a retirement plan,” one 22-year-old engineer told me, “but to be honest, I have to say that I count on that happening in my lifetime.” Living in Silicon Valley without making a bundle in an IPO or acquisition just doesn’t seem possible.

This is the key part of the piece. Farhad seems fundamentally uncomfortable with the economics of tournaments — X is a little bit better than Y, but X will make vastly more; or rather X joined the right firm at the right time and thus makes vastly more, etc. Not only that, but X’s outsized success encourages all of the other letters of the alphabet to try their luck at matching it, even though most will wind up with far less. I fundamentally think this kind of tournament is perfectly fine. People know what they’re getting into. Engineers are choosing a profession in which there is a high level of dispersion. This is one reason why the profession attracts a fair number of high-wattage risk-takers. 

Of course, this situation benefits pre-IPO companies like Facebook and Twitter. Still, that’s only in the short run. Before long, they too will see workers fleeing for the next great pre-IPO darling. Less-noble startups aren’t above taking advantage of programmers’ stock-option dreams, either. “They use the excuse of ‘We don’t have much money, and you’ll be getting stock’ to be really stingy with pay,” one engineer told me. Need-less to say, the vast majority of these startups fail, leaving their workers in the lurch.

And inevitably big post-IPO companies pay their engineers more. Microsoft knows that its stock options aren’t going to explode in value, so it pays higher salaries. Problem solved.

Basically, Farhad found that lots of software engineers feel underpaid. That’s hardly surprising. But that doesn’t make it true.

One thing I find frustrating about this style of argument is that it can apply to almost anything, e.g., we could argue that actors and other entertainers create enormous value that they don’t come close to capturing as a class. Sure, some actors become rich and famous, but the vast majority don’t. Does it follow that actors as a class are underpaid? The idea would strike most people as a forehead-slapper. We accept that trying to become a movie star is a pretty straightforward tournament, and that not everyone who tries will become rich or even very comfortable. To be sure, many will argue that engineering is more important than the arts. I don’t find that proposition to be obviously true. This is a reminder that markets are a good way of dealing with diversity. We don’t have to agree on the value of acting as a profession vs. software engineering. 

There is a more persuasive argument one could make, which is that the cultural prestige of software engineering isn’t as high as it should be. That is a debatable proposition, and I suspect that it might make difference re: whether a young adult at the margin will choose consulting or investment banking or engineering. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.